actuarysmith

Since the plan will no longer exist, the loan will either have to be repaid immediately (in full), or the amount outstanding will become a deemed distribution (with taxes and possible penalties). The loan is an asset of the plan. If the plan no longer exists, the loan is in default if not paid back. Is there a another plan being set up by the sponsor? If so, maybe that plan could be set up to accept the loan. One other approach might be possible - would the employer give the participant funds (outside of the plan) sufficient to repay the loan. Then the participant would effectively "owe" the employer, not the plan. This would allow the employee to make payments to the employer as you have suggested. The downside, of course, is that the employer would have to "front" the cash to the participant and be willing to accept loan payments. There is the risk that the employee will terminate prior to all payments being made.

What is the required minimum investment? By your description I would guess that it is thousands. This would very likely result in a Benefits, Rights, and Features discrimination issue. See 1.401(a)(4)-4© Effective availability.

Thanks for the clarification and additional input. Do you think that it is possible to have an irrevocable election that applies only to a particular plan? Or do you understand the regs to state that such an election would apply to ALLS PLANS sponsored by the employer? I have always advised clients that the only way to get out of the election is to terminate the plan for which the election was valid for, and set up another new plan (Of course, if it is a 401(k) you have to be careful regarding the issue of not setting up a replacement plan within 12 months).

I agree - irrevocable means for ever and ever with regard to THAT plan only. Not another plan the employer may set up. I am not confusing deferring 0% with irrevocable- in the former the employee is actually a participant, in the latter, he/she is not a participant. I did some checking, and it appears that you can exclude employees who sign an IRENTP from ADP/ACP/404, etc. However, the plan must still pass the 410(B) 70% test based upon statutory exlcusions only. Therefore, these folks would be counted in the total number of statutory employees who were eligible. This is only likely to be a problem with a fairly small employer.

The plan document should explicitly state whether you use compensation from entry, or compensation from the first day of the plan year in which an employee becomes eligible. Please refer to the plan doc for guidance on this question - it should not be a matter of opinion or interpertation, it should be a spelled out in black and white.

I'm not following the logic of the last response. (Maybe it's just Monday morning and I haven't had sufficient caffiene intake). Our firm has always held the opinion that if an "otherwise eligible" employee (HCE or NHCE) signs an irrevocable election not to participate - they were still included in all relevant tests (ADP/ACP/410(B), etc.) This means that if you have a large number of these folks, you may not pass coverage. One additional question that just occurred to me is - do you include their compensation for 404 deduction purposes?

I would think that even if you got a Det Letter on this scheme, you would still need to test each group (benefit structure) for non-discimination in terms of Benefits, Rights, and Features.

Why is the April 1 date an issue? An employer has up to 12 months after the close of the plan year to make safe harbor contributions. Therefore, the fact that the trust wasn't established until June 1 does not seem relevant. In fact, it might be an advantage for HCE's if you leave the date at April 1. This allows you to count compensation for deferral purposes back to April 1 and may allow some HCE's to put more money into the plan for the short plan year. (Of course, they would effectively have to contribute at a higher rate during the period 6/1 - 12/31).

Sorry......MWeddell is right about not being able to aggregate 401(k) and MP for 410(B). I've been looking at too many 3/15 ADP/ACP tests and fried my brain circuits. Since you do not have any HCE's it appears that you are free to proceed as planned. Good Luck!

This seems like a non-issue. Now that 401(a)(26) no longer applies to DC plans, we will probably see more "segment" plans (i.e. plans set up to cover different groups). The plans can be aggregated for discrim testing and will most likely pass. I would guess that a large portion of the hourly employees covered under the Davis Bacon are non-Highly Compensated Employees. Since they are getting a large benefit, the testing should be no problemo. As far as just letting the Davis Bacon folks opt out of the 401(k)rather than excluding them - you would still have to include them in your ADP/ACP testing (probably with a bunch of zeros). I think that you would need to exclude them by definition.

I agree with ERead. Sometimes employers will try to fund-as-you go during the year on a profit sharing plan. Regardless of whether it is daily val or balance forward, there are usually year-end adjustments to be made. They are normally the result of an employer not understanding or performing the calculations correctly. For example, the plan may use compensation from the first day of the plan year and the client uses compensation from entry. Another example is an employer trying to use a modified definition of compensation, such as excluding bonus or overtime when the plan defines the use of gross comp. Although this can be done, it is usually difficult due to discrim issues. Another example is when a plan has a year-end employment requirement, or when the plan is integrated with social security (or even cross-tested). Finally, another example is when a plan is top-heavy and the employer gives 3% of pay using the plan definition, rather than the statutory definition of comp. In all of these cases, a year-end true up is required by the employer. Sometimes it will mean shifting funds from one participants account to another account. In other cases it will mean the employer must deposit additional contributions to the plan.

Yup, I agree with the other respondent.

I have dealt with this issue in unrelated plans, but not where there is an ownership overlap. At the risk of being "the first penguin in the water" I would say that the ownership overlap does not mean that one plan would have / could have / should have given notice to the other plan. There are many situations where the "owner" has no knowledge of the day to day activities of the businesses. further, each company probably uses different payroll services, and has different personel handling payroll internally. The prototype document that we use (corbel) says that it is the participants responsibility to notify the plan sponsor about the issue. If the plan sponsor is not notified by a certain date, then the excess cannot be removed from the plan, but the participant is still taxed (twice).

Why would the "timely deposit" requirement by applied any differently for owners? In fact, in a preverted sense, a participant could almost make a case that this was discrimination in terms of benefits rights and features in a downward market (i.e. the employees contributions are being invested immediately as the market drops, the owners contributions are being held as cash equivalents and are not dropping in value. Therefore, the non owners are losing money while the owners are not. The owners will invest later when the market bottoms out). I know that this is not the specific issue that you are addressing - but I don't recall that the timeely deposit requirement makes any distinction between owners, HCE's, Trustees, NHCE's, KEYs, non-Keys, etc. or whatever. All deposits must be made timely - period............

According to the IRS alert guidelines #2 (vesting) - IRS interpretation is that the vested percentage cannot be decreased PERIOD, whether or not the benefits (or contributions) have actually been accrued yet or not. This is slightly different that what a strict reading of the code would suggest. This means that having one schedule for "old" money and another for "new" money would be impermissable. I think that the best thing to do would be to just have all existing participants on the amendment date fall under the old vesting scheule for all funds. The new participants after the amendment date would fall under the new schedule.

The last response suggests freezing the old plan and setting up another plan with a vesting schedule. I don't believe this will fly - 1) if the prior plan remains in existense, then I believe that both plans have to be aggregated for discrim testing (including benefits, rights and features). 2) if the prior plan is terminated, the sponsor would be precluded from setting up a replacement plan for a period of 12 months.

Pardon me folks, but it appears that this thread has become nothing more than a political forum for airing sour grapes. Let's stay focused on BENEFITS!! That's what this website is all about.

Question is not complete- when was the sep-IRA adopted? What eligibility requirements were selected? When did the attorney start the current sole-prop business?

It should also be distinguished from "matching" employer contributions. Non-elective contributions are those made by an employer on behalf of eligible particants, regardless of whether or not they contribute.

I was actually responding to KJohnson, not the last message. Several new messages slipped in between the one I was responding to.

Me - one last time...... I believe that I said exactly the same thing earlier as the last message, albeit he said it much more eloquently. Bottom line is still the same, "take" the unearned current-year contributions from the terminated participants (prior to year-end) and reallocate them to the other participants according to the method specified in the document (comp/comp, integrated, whatever). The net result will be that the other paricipants will end up with larger contributions than maybe was originally intended. The much riskier approach is to "refund" the contributions back to the sponsor. This may or may not fit under self correction programs, may be handled through vcr/cap, or the sponsor may just sit back and play audit roulette. (If the client opts for this last approach, I would write a big CYA letter to the client advising against this approach and keep it in your files). Good Luck!

Assuming that the problem is excess contributions (meaning that the plan failed ADP - rather than the participant put more than $10,500 in the plan)then the answer really seems rather simple - ask "What part of failed discrimination testing don't you get?" or "What part of plan disqualification don't you get?". I know that it is easier said than done, but that is the kind of client that you may seriously want to consider firing. (On the basis that they are not following the regs in good faith, and they are disregarding your advice.) It's the type of client that may be audited later and try to bring you in on the whole mess! (And share in the cost of correction) Run Forest Run!

I agree with the last comment. However, it is the participants responsibility (not the employers) to monitor his overall 401(k) limit. The unrelated employers have no way of knowing about each other. Further, in some prototype documents it states that if the paricipant doesent let the employer know of the excess by a certain date, then the funds CANNOT come back out of the plan, but the participant must still pay the tax on the excess. (even though it does not come back out of the plan).

Since we are within the "remedial amendment period" simply create an amendment with an appropriate effective date and get it signed.

Am I missing something here? Why wouldn't you use $5,000 for the average benefits test? This is the total allocation that the participant receives. I would use it for testing purposes. The fact that it is really an "employee contributed" employer contribution is irrelevant.